Entrepreneurs Abound : Hungary: A Boomlet in Capitalism

Times Staff Writer

Zoltan Palmai, a cheerful extrovert in his mid-40s, charged with seemingly boundless energy, had a dream.

As long as he can remember, Palmai, an engineer who confesses that he’s always considered himself a bit of a capitalist at heart, wanted to own and manage his own hotel, a family business that would “give my sons a start in life.”

On the day after Christmas last year, Palmai’s dream came true: The Hotel Victoria, with six floors, 32 comfortable rooms and an official three-star rating from the Hungarian government tourist agency, opened its tinted glass doors for business.

Situated on a quiet street a block from the picturesque Buda Castle, the Victoria is Communist Hungary’s first privately owned hotel, and almost certainly the only one in a Soviet Bloc country. Judging by the number of West German, French and American tourists streaming through its tiny lobby, business is booming.


Symbol of Reforms

More than just an oddity, Palmai’s hotel stands as a striking symbol of Hungary’s move toward private enterprise in its thriving consumer economy, a major element of the liberalizing economic reforms that the country has pioneered under Moscow’s watchful gaze since the late 1960s.

Palmai’s hotel was made possible by a 1982 law allowing a variety of new forms of small private and semi-private businesses within the socialist economy.

Three years later, more than 320,000 Hungarians--6% of the labor force--have joined to form 23,000 “small ventures,” as officials prefer to call them. The Hotel Victoria, built and equipped at a cost of $700,000, is the largest and most visible of them.


Altogether, counting 150,000 private farmers and shopkeepers who were allowed to operate under earlier laws, almost one Hungarian worker in 10 is engaged in some form of legal moneymaking based on private initiative.

A Model for East

The effects of this and other bold deviations from the Soviet economic model are evident everywhere in Hungary. Nearly 30 years after Soviet tanks crushed the 1956 anti-Soviet revolution led by Imre Nagy, this country of 10.6 million people has become the economic showcase of the Communist world and a model for China in shaping its own reforms on a vaster scale.

The selection and quality of goods in Hungary’s well-stocked stores is not yet fully up to Western standards, and big gaps still exist in consumer services--from the creaking telephone system to inadequate car repairs. Even so, Hungary is more prosperous than its Communist neighbors, and its living standards are decades ahead of the Soviet Union’s.


As a Western diplomat living in Budapest puts it, “the only lines in Hungary are at the cashier.”

Cautious Movement

Under the leadership of Janos Kadar, whom the Soviets installed in power when they suppressed the 1956 uprising, Hungary has cautiously edged away from the strict central planning, arbitrary pricing and prohibitions on private enterprise that are the hallmarks of orthodox Communist economies.

In what may seem to Westerners like a careful and systematic reinvention of the wheel, Hungary has let most prices rise to reflect real market costs and made profitability the criterion of success in industry. It has also abandoned all but general economic plans, which means no more instructions to factories telling them how many sewing needles and bicycles and size 11 shoes to produce.


Some unprofitable state-owned factories are being forced to lay off employees and, in at least one instance, to declare bankruptcy. In addition, workers are being allowed to elect factory directors from among state-approved candidates.

A True Bond Market

There is no stock market in Hungary yet, but there is a bond market--the first in the Soviet Bloc. Since a law went into effect in 1982 allowing state enterprises to issue capital investment bonds, state firms have offered 30 bond issues worth a total of $34 million. Private citizens have bought a third of the bonds and state enterprises the rest. Last September, the Hungarian State Development Bank began repurchasing and reselling some of the bonds, launching a true market.

Westerners may be forgiven for wondering if this doesn’t sound a little like capitalism, but Hungarian officials say emphatically that it isn’t so. They note that the Communist Party retains its monopoly on political power and that the primary means of production, in keeping with Marxist precepts, remain in the hands of the state.


Moreover, the new small businesses are fenced in by a thicket of tax and legal regulations designed to keep them small. Zoltan Palmai, for instance, can employ no more than nine people--about one-third the normal complement for a state-owned hotel of the same size--and he pays a 65% tax on receipts.

“Please don’t write that this is capitalism,” one official begged. “We have our own conservatives who read such things, and it doesn’t help. Besides, who says that all good economic ideas must be capitalist and all the bad ones socialist?”

Palmai, for one, observes diplomatically that his sparkling new hotel simply proves that “socialism doesn’t have to be a social system of the poor.”

Socialist Consumerism


Hungarian economists prefer to explain the reforms not as a retreat from socialism but as a means of strengthing it by taking into account the long-neglected needs of consumers. Even so, the reforms have meant abandoning some prominent features of the Soviet economic model.

“Our basic aim is very simple: It’s a better living,” said Janos Follinus, an economist and editor of a quarterly journal, the Hungarian Economy. “This is the only sensible thing for each government, or it should be--to the do the best for its own people.

“For a long time, we copied the Soviet economic model, including its main pillar, the central planning system and compulsory plan targets for factories dictated from above.

“But we have realized that it’s practically impossible for the state to prescribe everything--to manufacture so many pairs of women’s shoes of this color and that size, and so on. Impossible. No genius can predict changing consumer demands. So we came to the decision that this system should be abolished. There is still a general plan, of course, but everyone makes some plans. You and I do, and so does General Motors.”


In part, the 1982 law permitting new forms of private enterprise simply legalized a nationwide black market in consumer goods and services. Backyard mechanics, for example, who had been fixing cars for years, could now band together with a few friends and rent a garage formerly run by the ponderous and inefficient AFIT state monopoly on car repairs. (The service is better but still slow, because spare parts, all of which have to be imported from the Soviet Union, Poland and Romania, are still in short supply.)

Many state-owned shops and restaurants have been auctioned off to private groups to run on a contract basis. As the changeover began, Kadar, the Hungarian leader, is said to have wondered aloud why it was necessary in the first place to have nationalized hairdressers.

Semantic Jungle

Hungary’s small ventures come in at least five varieties, with ponderous titles and bewildering legal and tax distinctions. Among them are “industrial and service cooperative trade groups” and “private economic working teams” and “economic working teams within (state) enterprises.”


The names seem to be the product of a strenuous effort to avoid capitalist terms like “business” that might alarm orthodox Marxist ideologues in Moscow, as well as Budapest, who have misgivings about Hungary’s reforms.

These steps may seem heretical, but their beneficial effect is apparent on the capital’s bustling streets. Along with the scores of boutiques and restaurants and private repair shops that have opened in the last three years, new kinds of consumer services are popping up like mushrooms after a spring rain.

Real estate agencies, for instance, have emerged to help people find scarce apartments--for a fee. What is probably Eastern Europe’s only used-car dealership operates out of a storefront in central Budapest. A chartreuse-painted sign on the window says a Commodore 64 home computer will match up buyers and sellers, a useful service in a country where used cars sell for more than new ones because they are available immediately--without the usual six-year wait.

Video Games Exported


With as many as 100,000 personal computers in use in Hungary, a number of small software firms have opened, and several are already exporting video games to the West.

As elsewhere in Eastern Europe, there seems almost no limit to the energy and innovation straining for release, yearning to profit by devising cheaper solutions to old problems. A group of Hungarian mountain climbers has formed a small firm that repairs industrial chimneys at a fraction of the usual cost. Unlike state repair crews, the mountaineers have no need for expensive scaffolding.

By far the most common form of small business made possible by the 1982 law are the hybrid state and private firms known by their Hungarian initials as VGMKs. Formed mainly within factories by teams of moonlighting workers, these small subsidiary firms provide maintenance services or extra production in their off-hours. Averaging 11 workers each, they rent their machinery and buy their materials from the factory, pay the state a modest tax and divide the profits among themselves.

By the end of 1983, 98,000 workers were moonlighting in 9,192 VGMKs around the country. By the end of 1984, their numbers had roughly doubled, to 17,000 firms with 200,000 workers or 4% of the nation’s labor force. The driving power behind this expansion is money: The typical blue-collar member of a VGMK doubles his monthly income.


Legalized Moonlighting

While industry reaps most of the benefits from legalized moonlighting, the subsidiaries are also filling gaps in the consumer economy. One team in a Budapest furniture factory, for example, works extra shifts turning out custom-built, wall-to-wall storage cabinets and closets.

“You can’t find anything like this in the stores,” Istvan, a middle-aged lawyer with a wife and two children, said as he showed a visitor a wall of gleaming new cabinets in his three-room apartment. “They came out here one Friday and took the measurements, then they were back in two weeks to put them in. The workmanship is excellent.”

Like most moonlighters, the carpenters took care to work in their off-hours, not on state time, and even used taxis rather than borrowing a factory truck to make the delivery, the lawyer said.


“They don’t want to give anyone a pretext for canceling their license,” he explained.

Competition, the profit incentive and the freedom to dismiss slackers--something state enterprises find almost impossible to do--has given the subsidiaries, along with other small businesses, a high level of productivity.

“Deadlines are usually met, the work they perform is up to general quality standards, and the prices they charge are 20% to 30% lower than had been paid for the work previously,” an article in a recent issue of the Hungarian Economy noted.

The Darker Side


There is, however, a darker side to Hungary’s economic miracle, as many call it.

Hundreds of thousands of workers are on double shifts--one for the state, one for themselves--less out of desire than necessity. Faced with steadily rising prices for food and consumer goods, many families are finding it harder to make ends meet on ordinary wages, let alone to save enough for a costly apartment or a car.

There are signs, moreover, of growing social tension between Hungary’s haves and have-nots, both of which have multiplied in the past few years. While living standards rose last year for one-third of the population in spite of inflation, they declined for a quarter of Hungarians, especially for pensioners on fixed incomes and for those like single mothers who work at low-paid jobs and have no chance to moonlight. For them, the showy affluence of some private entrepreneurs is a source of envy and resentment.

Newspapers and television reflect these strains in a continuing debate over whether it is all right in Communist Hungary to become a millionaire, even by legal means. There is no consensus yet, but many find the disparity between poverty and wealth in Hungary--exemplified by the foreign cars and country homes and swimming pools of the affluent--more than a little disconcerting.


Wealth an Emotional Issue

The number of the truly wealthy may be no more 10,000 to 15,000. But wealth is an emotional issue, fueled by statistics indicating, for instance, that Erno Rubik, the famed Hungarian inventor of Rubik’s Cube--he is reputed to have earned $1.4 million in patent royalties--is not among the 300 richest Hungarians. On the other hand, a quarter of the population lives below the official poverty line of $50 a month.

“It’s true that some people are getting very rich,” an editor of World Economics Weekly said. “Of course, some of the wealth comes from speculation and price-gouging. But the real problem is that some people are getting very rich simply because they are very good at what they do.

“Sometimes ordinary people find themselves in sympathy with orthodox (Marxist) views. Economic growth is fine, they say, but some of this affluence seems unjust.”


Three years into the boom in small private enterprise, there are signs of a conservative Marxist backlash. Ironically, Palmai’s hotel--mainly because it is so visible--has helped arouse conservative fears of creeping capitalism in Hungary.

Progress or Profiteering?

To hard-line Marxists, the uneven distribution of affluence implies that some must be profiting at the expense of others, in violation of the egalitarian principles of socialism. To the liberal reformers, Marxist orthodoxy fails to account adequately for human nature, which makes some people more successful than others. Carried too far, they argue, egalitarianism gets in the way of economic progress.

“We’re all born as equals, but we are not all the same people,” said a Hungarian economist who asked not to be identified by name. “Some are more talented than others. Some are industrious, some are lazy. Pride and envy are facts of life. Human nature hasn’t changed over hundreds of thousands of years. It’s the same in socialism and capitalism.”


Few Hungarians worry that the reforms will be rolled back to the 1950s, when Stalinist central planning held sway. Ferenc Havasi, a reformist Politburo member considered a likely successor to Kadar, who just turned 73, has said this would be tantamount to returning to the Stone Age.

But many remember that conservative ideologists derailed the reforms for six years, from 1972 to 1978, with a plethora of new taxes and legal restrictions inspired by widespread envy at farmers made newly prosperous by relaxed controls over agriculture.

‘Corporate’ Tax Rising

The same may be happening now to the multitude of small ventures. The “corporate” tax on small firms rose this year to 6% from 3%, and a 10% special tax has been imposed on goods that state enterprises buy from small ventures. The effect is to erode their competitive edge with less efficient state enterprises. Some economists warn that further steps in this direction could have withering effects on Hungary’s fragile bloom of consumer prosperity.


Zoltan Palmai, an irrepressible optimist, says he has faith in the pledges of the state not reverse its course. But he insists that the real test of Hungary’s commitment to allow small private enterprise will be whether it allows him to fulfill his next dream--a chain of hotels.

That, economists say, is not about to happen. As the Kadar era moves toward its inevitable end and Hungary prepares itself for a change in leadership, probably in the next few years, the future of small private enterprise hangs in the balance as reformist and hard-line Communists maneuver for position.

“Right now,” said one economist, “we are pausing. We’re in a wait-and-see period in our reforms.”